The word bubble gets tossed around loosely these days. By my count, depending on who you listen too, there’s a bubble in stocks, bonds, housing, cryptocurrency, and student loans.
There’s no way it’s all true (okay, probably bitcoin). Not everything has to end in a bubble and a crash but it will happen again eventually because the one thing humans are great at is finding new ways to repeat history.
Of course, Warren Buffett and Charlie Munger have made a career of profiting from those repeated mistakes. Their understanding of history, human nature, and experiencing a few bubbles in their day, allow them to recognize and avoid what draws so many people in.
Buffett explains why it happens this way:
There’s no question that markets have momentum. And that when there is enough momentum, it takes over everything. I mean, when you — that’s how you get bubbles.
Ben Graham used to say you get in more trouble with a good idea than a bad idea because the good idea you originally had — the idea that stocks were cheaper than bonds generally — after a while, the very action of the stocks becomes more important than the fundamental reasons and the fundamental reasons dissapear and people buy something because it’s going up. There’s no telling how far it will go but you can be pretty sure there will be a bad ending.
This is especially true if you know nothing about the asset other than it’s going up.
I get into enough trouble with things I think I know something about. Why in the world should I take a long or short position in something I don’t know anything about?
If you’re buying something because it went up yesterday or last week, that is not a good reason for buying anything. It will get you in trouble over time. – Warren Buffett
But that’s not the entire reason why people dive in.
What draws investors into an asset bubble is not only that prices are rising, but seeing other people making a lot of money quickly while they’re not. Of course, the few success stories are told in the news so often that it seems like they’re the only one missing out.
So greed plays a role but envy is what drives people to make the mistake of chasing what appears to be easy money.
Investing is frustratingly like the lottery at times. The winner isn’t smarter, more brilliant, or more skillful than the millions of other people who also bought a ticket. They were at the right place, at the right time.
Investing is no different. Intelligence and skill are not prerequisites for making money.
The slim chance exists for anyone to make a quick fortune. Dumb luck happens. It’s frustrating to watch. Yet, it’s enticing. It’s what draws new people into the markets all the time.
It’s just that dumb luck is a terrible strategy because you almost always end up worse off than you started. And the lucky few it might work for, often confuse it with skill.
Charlie Munger’s answer to all of it is to give most things a wide berth:
When there’s enough incentive, bad things will happen. It’s bad people — crazy bubble, bad idea — luring people into the concept of easy wealth without much insight or work. It’s the last thing on earth you should think about. If it worked it would be bad for you, because you’d try and do it again. It’s totally insane.
And by the way, I’ve just laid out a wonderful life lesson for you. Give a whole lot of things a wide berth. They don’t exist. Crooks, crazies, egomaniacs, people full of resentment, people full of self pity, people who feel like victims, there’s a lot of things that aren’t going to work for you. Figure out what they are and then avoid them like the plague. And one of them is Bitcoin.
And the worst thing would happen if you won, because then you’d do it again. It’s total insanity. And it’s so easy to simplify life from just all these things are beneath you.
Few people make a fortune overnight. Investing is hard. It takes time. It doesn’t require a ton of intelligence. You do have to be smart enough to know what you know so can avoid what you don’t know. And you need the discipline and patience to follow through.